Brazil faces contraction

February 19, 2015 10:54 AM

Brazil’s real declined to a one-week low as concern that Latin America’s largest economy will contract this year for the first time since 2009 made the currency less attractive to investors.

The currency fell 0.4% to 2.8496 per U.S. dollar at 11:11 a.m. in Sao Paulo, approaching the 10-year low of 2.8679 per dollar that was posted Feb. 11.

Analysts in a central bank survey published Wednesday forecast Brazil’s gross domestic product will shrink 0.42% in 2015. In a sign of pessimism, net overseas holdings of futures contracts betting against the real have increased to a record high $36.5 billion.

“The outlook for Brazil’s economy is still bleak,” Paulo Nepomuceno, the chief economist at Coinvalores CCVM in Sao Paulo, said in a telephone interview. “It is a combination of negative sentiment that should not improve much in the near term.”

The real has declined 21% in the past six months, the most among 16 major currencies tracked by Bloomberg, on concern a stalled economy and fiscal weakness will lead to a sovereign credit downgrade.

Brazil’s government is unwinding tax breaks as it strives to boost confidence and stop gross debt from expanding, Finance Minister Joaquim Levy said in a presentation to investors Wednesday in New York.

Levy’s ‘Responsibility’

“Our aim is to stabilize the gross debt—it’s what we’re working to achieve in the next 10 months,” Levy said. “That’s the commitment of the president, and that’s our responsibility.”

Gross debt surged last year to 63% of GDP from 57% in 2013. Levy replaced Guido Mantega in January after President Dilma Rousseff won a runoff election by the narrowest margin of any president since at least 1945.

Levy said inflation expectations are starting to converge closer to the 4.5% midpoint of the target range. The economists surveyed by the central bank expected consumer prices to rise 7.27% this year and 5.6% in 2016.

One-month implied volatility on options for the real, reflecting projected shifts in the exchange rate, was the highest among emerging-market currencies tracked by Bloomberg after the Russian ruble.

To support the currency and limit import price increases, Brazil sold the equivalent of $97.9 million of currency swaps Thursday. The central bank plans to offer as much as $100 million a day until at least March 31.

Swap rates on the contract maturing in January 2016, a gauge of expectations for changes in Brazil’s borrowing costs, dropped 0.01 percentage point to 13.17%.

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